Answers

Fundamentals Level Skills Module, Paper F6 (UK) Taxation (United Kingdom) 1 (a) (i) Domingo Gomez Income tax computation 200809 Pensions (4,500 + 2,300) Building society interest (14,400 x 100/80) Interest from savings certificate (exempt) Personal allowance Taxable income Income tax 2,320 at 10% 14,950 at 20% 17,270 Income tax liability 6,800 18,000 24,800 (7,530) 17,270

June 2009 Answers

232 2,990 3,222

(1) No tax relief is available in respect of the donations as they were not made under the gift aid scheme. (2) Domingos total income exceeds 21,800, so his personal allowance of 9,030 is reduced to 7,530 (9,030 1,500 (24,800 21,800 = 3,000/2)). Tutorial note: The non-savings income is fully covered by the personal allowance, so the first 2,320 of savings income is taxed at the starting rate of 10%. (ii) Erigo Gomez Income tax computation 200809 Employment income Salary Pension contributions (36,000 x 6%) Charitable payroll deductions (12 x 100) Relocation costs Mileage allowance Personal allowance Taxable income Income tax 27,605 at 20% Income tax liability 36,000 (2,160) (1,200) 32,640 3,400 36,040 (2,400) 33,640 (6,035) 27,605 5,521 5,521

(1) Only 8,000 of relocation costs are exempt, and so the taxable benefit is 3,400 (11,400 8,000). (2) The mileage allowance received will be tax-free, and Erigo can make the following expense claim: 10,000 miles at 40p 8,000 miles at 25p Mileage allowance 18,000 at 20p 4,000 2,000 6,000 (3,600) 2,400

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(iii) Fargo Gomez Income tax computation 200809 Trading profit (64,800 2,600) Capital allowances Personal allowance Taxable income Income tax 43,000 at 20% 12,065 (55,065 43,000) at 40% 55,065 Income tax liability 62,200 (1,100) 61,100 (6,035) 55,065

8,600 4,826 13,426

(1) Fargos period of account is nine months long so the capital allowances in respect of his motor car are 1,100 (11,000 x 20% x 9/12 = 1,650 x 16,000/24,000). (2) Fargos basic rate tax band is extended by 5,200 in respect of the personal pension contribution and 3,000 (2,400 x 100/80) in respect of the gift aid donations. (3) The revised basic rate band is therefore 43,000 (34,800 + 5,200 + 3,000). Tutorial note: The advertising expenditure incurred during May 2008 is pre-trading, and is treated as incurred on 6 July 2008. An adjustment is therefore required. (b) (1) Unless the return is issued late, the latest date that Domingo and Erigo can file paper self-assessment tax returns for 200809 is 31 October 2009. (2) If Domingo completes a paper tax return by 31 October 2009 then HM Revenue and Customs will prepare a self-assessment tax computation on his behalf. (3) Fargo has until 31 January 2010 to file his self-assessment tax return for 200809 online. (c) (1) Domingo and Erigo were not in business during 200809, so their records must be retained until one year after 31 January following the tax year, which is 31 January 2011. (2) Fargo was in business during 200809, so all of his records (both business and non-business) must be retained until five years after 31 January following the tax year, which is 31 January 2015. (3) A failure to retain records for 200809 could result in a penalty of up to 3,000. However, the maximum penalty will only be charged in serious cases.

(a)

Gastron Ltd Trading profit for the year ended 31 March 2009 Profit before taxation Depreciation Amortisation of leasehold property Deduction for lease premium (working 1) Gifts of pens to customers Gifts of hampers to customers Donation Legal fees re renewal of lease Legal fees re issue of debentures Entertaining suppliers Entertaining employees Income from property Bank interest Dividends Profit on disposal of shares Interest payable Capital allowances (working 2) 640,000 85,660 6,000 1,200 1,100 0 0 0 1,300 0 20,600 12,400 54,000 80,700 0 735,260 (235,260) 500,000 62,640 235,260

4,920

Trading profit

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Working 1 Deduction for lease premium (1) The office building has been used for business purposes, and so the proportion of the lease premium assessed on the landlord can be deducted, spread over the life of the lease. (2) The amount assessed on the landlord is 49,600 calculated as follows: Premium received Less: 60,000 x 2% x (10 1) 60,000 (10,800) 49,200

(3) This is deductible over the life of the lease, so the deduction for the year ended 31 March 2009 is 4,920 (49,200/10). Working 2 Plant and machinery Pool 16,700 Motor car 18,400 Allowances

WDV brought forward Additions qualifying for AIA Equipment Lorry AIA 100% Other additions Motor car Proceeds equipment WDA 20% WDA Restricted Addition qualifying for FYA Motor car FYA 100% WDV carried forward Total allowances Tutorial notes:

21,600 17,200 38,800 (38,800) 9,800 26,500 (3,300) 23,200 (4,640) 18,560 16,200 (16,200) (3,000)

38,800

4,640 3,000

18,560

15,400

16,200 62,640

(1) Gifts to customers are only an allowable deduction if they cost less than 50 per recipient per year, are not of food, drink, tobacco, or vouchers for exchangeable goods, and carry a conspicuous advertisement for the company making the gift. (2) The costs of renewing a short-lease (less than 50 years) and of obtaining loan finance are allowable. (3) The only exception to the non-deductibility of entertainment expenditure is when it is in respect of employees. (4) Interest on a loan used for trading purposes is deductible in calculating the trading loss on an accruals basis. (5) The cost of the equipment sold will have originally been added to the pool, so the disposal proceeds of 3,300 are deducted from the pool. (b) Gastron Ltd Corporation tax computation for the year ended 31 March 2009 Trading profit Property business profit Bank interest Chargeable gain Profits chargeable to corporation tax Franked investment income (36,000 x 100/90) Profit Corporation tax 600,000 at 28% Marginal relief 7/400 (750,000 640,000) x 600,000/640,000 500,000 12,800 12,400 74,800 600,000 40,000 640,000 168,000 (1,805) 166,195

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(1) The property business profit is 12,800 calculated as follows: Rent receivable First tenant (1,800 x 9) Second tenant (1,950 x 2) Impairment loss (1,800 x 2) Decorating 3,600 3,700 (7,300) 12,800 (2) Gastron Ltd has one associated company, so the upper limit is reduced to 750,000 (1,500,000/2). Tutorial note: Group dividends are not included as franked investment income. (c) (1) Gastron Ltds corporation tax liability for the year ended 31 March 2009 must be paid by 1 January 2010. (2) If the company does not pay its corporation tax until 31 August 2010, then interest of 8,310 (166,195 at 75% = 12,465 x 8/12) will be charged by HM Revenue and Customs for the period 1 January 2010 to 31 August 2010. (d) (1) Companies form a capital gains group if at each level in the group structure there is a 75% shareholding. (2) However, the parent company must also have an effective interest of over 50% in each group company. (e) (1) Gastron Ltd and Culinary Ltd must make the election by 31 March 2011 (within two years of the end of the accounting period in which the disposal outside of the group occurred). (2) Culinary Ltds otherwise unused capital loss of 66,000 can be set against Gastron Ltds chargeable gain of 74,800. (3) It is beneficial for the balance of the chargeable gain of 8,800 (74,800 66,000) to arise in Culinary Ltd as it will only be taxed at the rate of 21%, instead of at the marginal rate (2975%) in Gastron Ltd. 16,200 3,900 20,100

Nim Lom CGT liability 200809 Ordinary shares in Kapook plc Deemed proceeds (10,000 x 370) Cost Ordinary shares in Jooba Ltd (no gain, no loss) Antique table UK Government securities (exempt) Capital losses brought forward Chargeable gains Annual exemption Taxable gains 37,000 (23,400) 13,600 3,500 17,100 (7,500) 9,600 (9,600) Nil

(1) The shares in Kapook plc are valued at 370 ((360 + 380)/2) as this is lower than 375 (370 + 1/4(390 370)). (2) The disposal is first matched against the purchase on 24 May 2008 (this is within the following 30 days), and then against the shares in the share pool. The cost of the shares disposed of is, therefore, 23,400 (5,800 + 17,600). Share pool Number 8,000 6,000 14,000 (8,000) 6,000 Cost 16,200 14,600 30,800 (17,600) 13,200

Purchase 19 February 2000 Purchase 6 June 2005 Disposal 20 May 2008 (30,800 x 8,000/14,000) Balance carried forward

(3) The antique table is a non-wasting chattel. However, there is no restriction as the gain of 3,500 (8,700 5,200) is less than 4,500 (8,700 6,000 = 2,700 x 5/3).

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(4) The set off of the brought forward capital losses is restricted to 7,500 (17,100 9,600) so that chargeable gains are reduced to the amount of the annual exemption. (5) Nim therefore has capital losses carried forward of 9,200 (16,700 7,500). Tutorial notes: (1) The transfer of the 5,000 1 ordinary shares in Jooba Ltd to Mae does not give rise to any gain or loss, because it is a transfer between spouses. (2) The disposal of UK Government securities is exempt from CGT. Mae Lom CGT liability 200809 Ordinary shares in Jooba Ltd Disposal proceeds Cost (16,000 x 2,000/5,000) House Disposal proceeds Cost Principal private residence exemption Goodwill Freehold office building Entrepreneurs relief (216,000 x 4/9ths) Investment property Copyright Disposal proceeds Cost (10,000 x 15/20) 30,400 (6,400) 24,000 186,000 (122,000) 64,000 (56,000) 8,000 80,000 136,000 216,000 (96,000) 120,000 34,000 9,600 (7,500) 2,100 188,100 (8,500) 179,600 (9,600) 170,000 30,600

Capital losses brought forward Chargeable gains Annual exemption

Capital gains tax 170,000 at 18%

(1) One of the eight rooms in Maes house was always used exclusively for business purposes, so the principal private residence exemption is restricted to 56,000 (64,000 x 7/8). Tutorial notes: (1) Nims original cost is used in calculating the capital gain on the disposal of the shares in Jooba Ltd. (2) The investment property does not qualify for entrepreneurs relief because it was never used for business purposes. (3) The copyright is a wasting asset. The cost of 10,000 must therefore be depreciated based on an unexpired life of 20 years at the date of acquisition and an unexpired life of 15 years at the date of disposal.

Anne Attire (a) VAT return Quarter ended 30 November 2008 Output VAT Cash sales (28,000 x 175%) Credit sales (12,000 x 95% x 175%) Input VAT Purchases and expenses (11,200 x 175%) Impairment loss (800 x 95% x 175%) 4,900 1,995 1,960 133 (2,093) 4,802

VAT payable

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(1) The VAT return for the quarter ended 30 November 2008 should have been submitted by 31 December 2008, being one month after the end of the VAT period. Tutorial notes: (1) The calculation of output VAT on the credit sales takes into account the discount for prompt payment, even for those 10% of customers that did not take it. (2) Relief for an impairment loss is not given until six months from the time that payment is due. Therefore relief can only be claimed in respect of the invoice due for payment on 10 April 2008. Relief is based on the amount of output VAT that would originally have been paid taking into account the discount for prompt payment. (b) (1) Anne can use the cash accounting scheme if her expected taxable turnover for the next 12 months does not exceed 1,350,000. (2) In addition, Anne must be up-to-date with her VAT returns and VAT payments. (3) Output VAT on most credit sales will be accounted for up to one month later than at present since the scheme will result in the tax point becoming the date that payment is received from customers. (4) However, the recovery of input VAT will be delayed by two months. (5) The scheme will provide automatic bad debt relief should a credit sale customer default on the payment of a debt. (c) (i) Sale of assets on a piecemeal basis (1) Upon the cessation of trading Anne will cease to make taxable supplies, so her VAT registration will be cancelled on the date of cessation or an agreed later date. (2) Output VAT will be due in respect of the value of the fixed assets at the date of deregistration on which VAT has been claimed (although output VAT is not due if it totals less than 1,000). (ii) Sale of business as a going concern (1) Since the purchaser is already registered for VAT, Annes VAT registration will be cancelled as above. (2) A sale of a business as a going concern is outside the scope of VAT, and therefore output VAT will not be due.

Andrew Zoom (a) (1) (2) (3) (4) (5) (6) (7) (i) Andrew is under the control of Slick-Productions Ltd. Andrew is not taking any financial risk. Andrew works a set number of hours, is paid by the hour and is paid for overtime. Andrew cannot profit from sound management. Andrew is required to do the work personally. There is an obligation to accept work that is offered. Andrew does not provide his own equipment. Treated as an employee (1) Andrews income tax liability for 200809 will be: Employment income Personal allowance Taxable income Income tax 34,800 at 20% 9,165 at 40% 43,965 Income tax liability 50,000 (6,035) 43,965

(b)

6,960 3,666 10,626

(2) Class 1 NIC for 200809 will be 3,906 ((40,040 5,435 = 34,605 at 11%) + (50,000 40,040 = 9,960 at 1%)). (ii) Treated as self-employed (1) Andrews trading profit for 200809 will be 50,000, so his income tax liability will be unchanged at 10,626. (2) Class 2 NIC for 200809 will be 120 (52 x 230). (3) Class 4 NIC for 200809 will be 2,868 ((40,040 5,435 = 34,605 at 8%) + (50,000 40,040 = 9,960 at 1%)).

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Fundamentals Level Skills Module, Paper F6 (UK) Taxation(United Kingdom)

June 2009 Marking Scheme Marks

(a)

(i)

Domingo Gomez Pensions Building society interest Interest from savings certificates Donations Personal allowance Income tax

1 1 1/ 2 1/ 2 2 1 6

(ii)

Erigo Gomez Salary Pension contributions Charitable payroll deductions Relocation costs Mileage allowance Personal allowance Income tax

1/ 2

1 1 1 11/2 1/ 2 1/ 2 6

(iii) Fargo Gomez Trading profit Pre-trading expenditure Capital allowances Personal allowance Extension of basic rate band Income tax

1/ 2

1 2 1/ 2 2 1 7

(b)

Paper returns Return filed online

2 1 3

(c)

Domingo and Erigo Fargo Penalty

1 1 1 3 25

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Marks 2 (a) Profit before taxation Depreciation Amortisation of leasehold property Lease premium Assessable amount Deduction Gifts of pens to customers Gifts of hampers to customers Donation Legal fees re renewal of lease Legal fees re issue of debentures Entertaining suppliers Entertaining employees Income from investments Disposal of shares Interest payable P & M Pool AIA Expensive motor car FYA
1/ 2 1/ 2 1/ 2 11/2

1
1/ 2 1/ 2 1/ 2 1/ 2 1/ 2 1/ 2 1/ 2

1
1/ 2 1/ 2

2 11/2 1 1 15
1/ 2

(b)

Trading profit Property business profit Bank interest Chargeable gain Franked investment income Group dividends Corporation tax

2
1/ 2 1/ 2

1
1/ 2

2 7

(c)

Due date Interest

1 2 3

(d)

75% shareholding 50% effective interest

1 1 2

(e)

Time limit Set off of capital losses Tax rate

1 1 1 3 30

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Marks 3 Nim Lom Kapook plc Deemed proceeds Cost Share pool Jooba Ltd Antique table UK Government securities Capital losses brought forward Annual exemption Capital losses carried forward Mae Lom Jooba Ltd Proceeds Cost House Proceeds Cost Exemption Business Goodwill Office building Entrepreneurs relief Investment property Copyright Proceeds Cost Capital losses brought forward Annual exemption Capital gains tax 2 1 2 1 11/2 1/ 2 1 1/ 2 1/ 2
1/ 2

1
1/ 2 1/ 2

1
1/ 2 1/ 2

1 1 1/ 2 11/2 1/ 2 1/ 2 1/ 2

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(a)

Output VAT Cash sales Credit sales Input VAT Purchases and expenses Impairment loss Due date

1 11/2 1 11/2 1 6

(b)

Limit VAT returns and VAT payments Output VAT Input VAT Bad debt relief

1 1 1 1 1 5

(c)

(i)

Sale of assets on a piecemeal basis Cancellation of VAT registration Output VAT

1 1 2

(ii)

Sale of business as a going concern Cancellation of VAT registration Output VAT not due

1 1 2 15

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Marks 5 (a) Control Financial risk Basis of remuneration Sound management Required to do the work personally Obligation to accept work offered Equipment
1/ 2 1/ 2

1
1/ 2 1/ 2 1/ 2 1/ 2

4 (b) (i) Treated as an employee Employment income Personal allowance Income tax liability Class 1 NIC

1/ 2 1/ 2 1/ 2 11/2

3 (ii) Treated as self-employed Income tax liability Class 2 NIC Class 4 NIC
1/ 2

1 11/2 3 10

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